The Change

India Inc was hoping that the government’s promise of moving towards the corporate tax rate of 25 per cent over four years will be partially met in this Budget. But they were disappointed as the document has left corporate tax rate untouched.

That said, the Budget seeks to put more money in the hands of the middle-class through the move to provide full rebate for individual taxpayers having annual taxable income up to ₹5 lakh and through an increase in the standard deduction. While the direct income of ₹6,000 per year to small farmers is too small to make a material impact on demand for farm inputs, this coupled with other subsidies on MSP, fertilisers and interest subvention will give a small fillip to rural demand.

The allocation of ₹82,127 crore to schemes such as MNREGA, green revolution and Pradhan Mantri Krishi Sinchayi Yojana are also likely to help the rural economy.

Budget allocation of ₹36,691 crore for National Highways Authority of India, ₹19,000 crore for PM Gram Sadak Yojana and ₹25,853 crore for PM Awas Yojana are expected to result in higher order flows for construction companies, real estate players and boost demand for cement and steel.

The background

In the Budget of 2015, Arun Jaitley had proposed to reduce the rate of corporate tax from 30 per cent to 25 per cent over the next 4 years.

While the rate of taxation was reduced for smaller companies, with turnover up to ₹250 crore, higher surcharge and cess have been hurting corporates.

Also larger companies have continued to bear the brunt of higher taxes with effective tax rate of companies in BSE 500 at 29 per cent in FY18, slightly higher than the 28 per cent in FY17. Phasing out of various allowances is in fact beginning to hurt companies.

Earnings growth of India Inc has also not been smooth in Modi’s regime. Bad monsoons, melt-down in commodity prices, high interest rates and global slow-down hurt revenue growth in FY15 as well as FY16. But revenue growth was back on track from FY17, with growth of 13 per cent and 12 per cent in FY17 and FY18 respectively. Despite the disruptions caused by demonetisation and GST roll-out, declining commodity prices and interest rates as well as strong consumption helped revenue growth.

Earnings growth has also been steady from FY16, growing between 14 per cent and 17 per cent. In the recent quarters, while revenue growth has been good, margins have been under pressure due to rising commodity prices and rupee depreciation hurting commodity imports.

The verdict

Stocks in the fast moving consumer goods segment such as HUL, Dabur, Marico will derive the benefit of more income in the hands of rural and urban consumers. Small-ticket consumer durable makers such as Havells, V-Guard, Bajaj Electricals and TTK Prestige will also see more demand.

Since the farm income support is mainly targeted at small farmers, makers of farm inputs might not see too much boost in revenue.

Similarly, the woes currently plaguing road construction companies and real estate companies will negate the benefits accruing from the Budget.

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